12 July 2020
Charles Leggette
President of Austin Capital Retirement Plan Services
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Frozen Defined Benefit Pension Plans – an opportunity that is underserved and neglected
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A study of fees was the genesis of my observation 

In a study I prepared in 2009, I compared the fees for actuarial services performed for a frozen defined benefit pension plan both before and after the freeze. As I suspected, there was little difference, even though the amount of work can be dramatically less with a frozen plan.Examining 20 frozen plans near a fairly large heartland city, the fees spiked in the year the plan was frozen, and then over the next two years settled back to roughly pre-freeze levels. This situation opens the door for advisors to have a discussion with these Plan Sponsors. So how can one find Plans that are frozen?  Easy: it’s an IRS Form 5500 item that’s a selection item in most good 5500 data mining systems. 

What is the opportunity and what is pension de-risking? 

A very high percentage of defined benefit plans that are frozen are in the queue to be terminated or de-risked. Over and over I have heard clients say  “as soon as interest rates rise, we’ll sell our liabilities to an insurance company”.  That’s one form of de-risking, particularly when one sells a “block” of liabilities to a carrier. An example of a “block” would be all liabilities associated with retirees on your books, or the liabilities associated with all non-active employees. Even though interest rates on those liabilities are rather low, making the amount of the liability higher, you would also be off loading the administration and actuarial expense associated therewith. This can be substantial. 

However, many of those clients which I described as ‘waiting on interest rates to rise’ have been doing so for years. 

The opportunity then is to actively manage the entirede-risking and frozen plan management process. Each of these plans should have adopted a Pension Plan Termination Policy Statement that describes, much like an Investment Policy Statement,what the relevant metric issues are and under what circumstances the plan should be terminated or partially de-risked. 

This is a slippery slope. If, for example, a plan decides to be “fully funded” – i.e. assets equal liabilities – and interest rates rise,the result is that the Plan is over-funded and you now have a different kind of problem. Instead, if the Plan is heavily invested in interest-sensitive assets,assets and liabilities may be “synchronized” and be less vulnerable to upward bound interest rate shifts. 

A Tax Issue That Helps 

The Pension Protection Act clarified an issue regarding the final funding of a terminating pension plan.  In essence, if a company elects to fund the asset shortfall of an imminently terminating plan, they can deduct the entire amount in one year. Ostensibly, the carry-back and carry-forward provisions of the tax code would also be applicable. 

How  can Austin Capital help? 

There are three pieces to this complex puzzle: 1)  development of a Pension Plan Termination Policy Statement; 2) developing a pre-termination funding plan that puts the Plan Sponsor in a position to pull the trigger; and 3) administering the Plan with the goal of eventually terminating it. This last piece means evaluating lump sum/rollover versus annuity buy-out options, development of plan replacement policies using 401K and profit-sharing mechanisms, and examining Top-Hat Plan designs to compensate the Plan Sponsor’s  employees earning beyond the Internal Revenue Code pay limits. 

For more information call Charles Leggette,214.624.1038. 

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